Focus/Stock: Jeronimo Martins

Company Name : Jeronimo Martins (JMT)

Nb of shares : 629.293m

Last close : EUR17.305 (as of Jan 12, 2017)

Market Cap : EUR10.9 bn

Sector : Food retail

What’s the company doing ?

Jeronimo Martins SGPS SA is a Portugal-based holding company controlled by the Dos Santos family (56.14% of shares outstanding), with interests in retail business in Portugal (Pingo Doce, Cash & Carry), Poland (Biedronka) and Colombia.

Poland is by far the largest operations and the most profitable within the company. In 2016, it contributed EUR9.8 bn to revenue (67% of total) and EUR539m to EBIT (95% of total).

What happened ?

JMT published 4Q sales number (EUR4.35 bn) that were above consensus with strong lfl growth numbers in Poland (+7.6%) and Portugal (+3% and +6.6% for Pingo Doce and Recheio respectively).

How did the market appreciate it (Performance vs Bench) ?

Shares were up 4.4% on Jan 12, 2017 following 4Q sales numbers. JMT has been a top performer among European retailer, a reflection of its strategy and relatively solid financial performance.

JMT is a play on Emerging Europe. It’s focus on emerging markets (Poland) provides with a structurally high margin business that is both a source of sustained organic growth (see Q4) and high return on invested capital (18% on a after-tax basis after capitalising leases according to Morgan Stanley). This performance is remarkable because Poland is a very competitive market (11 international food retailers. Poland has 38.5m inhabitants, and a GDP per capita of $27,700).

The most appreciated fact about JMT is the turnaround plan its management took in the 2000s while the company was on the brink of bankruptcy. According to Morgan Stanley, this was « the most audacious turnarounds in the Europe Food Retail industry over the past ten years, by radically transforming Pingo Doce’s business model in Portugal » (from a « full-service surpermarket » to a « soft discount format retailer similar »).

The IT system was revamped in Poland and contributed to « increase the average basked from EUR3.80 in 2002 to EUR6.30 in 2011 as the store format was standardized and the banner experienced a virtuous circle of increased lfl sales, which led to higher profitability, price reinvestment and improving sales density. » (Source: Morgan Stanley)

Note that Poland is one of the few markets in Europe (next to Germany) where hard discount (HD) penetration is the highest (3,804 HD stores almost comparable to France for almost half the population; 100 HD stores per 1m inhabitant and 70,906 HD sqr meter per 1m inhabitant, way above Belgium, France, the UK, Portugal, Spain and Turkey).

In Portugal, the strategy at Pingo Doce (PD) was to reduce the number of Stock Keeping Units (or SKUs) from 16,500 to 5,500, with a focus on key brands and private labels. Interestingly, per Morgan Stanley, « one of the reasons why the assortment had become too large was because JM was chasing vendor rebates » (something that looks similar to other European retailer approach today).

This strategy improved the efficiency of logistics and « paradoxically allowed JM to get better terms from the remaining vendors. »

Private labels was significantly expanded (40% in 2011 vs 15% in 2002) with a focus on « Every Day Low Price » positioning and a reduction of labour/services in stores. Also 500 key items had their price lowered to match Lidl’s level. Focus on fresh products was maintained (to match consumer habits) and represented 35-37% of PD vs 20% at Lidl.

What’s the Valuation and What’s in the Price ?

JMT shares trade at a c52% premium to developed market peers and 34% premium to EM peers according to Bank of America Merrill Lynch.

« Once again, JM4s cash margin approach to the business ends up proving successful in Q4. Lights are almost all green, especially in Poland where Biedronka shows outstanding volume-driven 7.6% lfl sales growth against very strong comps in LY (+9.7%). » (Bryan Garnier)

« Inflation is likely to have played a key support to Biedronka’s lfl, with the group flagging market food inflation of +5.4% and +6.0% in October and November, respectively. » (BofAML)

« As JMT has been making a promotional push in Poland and Portugal, and given wages inflation, we expect limited margin leverage in Q4. We see the EBITDA margin reaching 6.0% in Q4 2017, stable vs Q4 2016. » (Deutsche Bank)